§2. United States Coin and Currency Bonds

A more definite test may be made where two standards are simultaneously used. An excellent case of this kind is supplied by comparing two kinds of United States bonds, one payable in coin and the other in currency. From the prices for which these bonds sold in the market it is possible to calculate the interest realized by the investor. The currency bonds were known as currency sixes and matured in 1898 and 1899. The coin bonds selected for comparison were the fours of 1907. The table on page 402 gives the rates of interest realized in the two standards, together with the premium on gold.

Several points in this table deserve notice. In 1870 the investor realized 6.4 per cent in terms of gold but was willing to accept a return of only 5.4 per cent currency. Why should a gold bond be thus inferior to a paper bond? This has become intelligible in the light of the theory which was explained in Chapter II. It meant the hope of resumption. Just because paper was depreciated below gold and there was a chance of bringing it up to par, there was in prospect a great rise in its value, as compared with gold. It was not until 1878, just before resumption, when the prospect of any further rise disappeared, that the relative position of the two rates of interest was reversed. After resumption in 1879, when paper money did reach par with gold, the two bond rates remained very nearly equal for several years, until fears of inflation from Greenbackism and Free-Silverism again produced a divergence. The quotations for 1894, 1895, and 1896 showed a considerably higher rate of interest Edition: current; Page: [402] in the currency standard than in the coin standard, as well as a higher rate in both standards than in previous years. The contrast is that between 2.7 per cent and 3.5 per cent in 1894, and between 3.2 per cent and 4.3 per cent in 1896. The divergence of the two rates is explainable Edition: current; Page: [403] as the effect of the fear of Bryan's free-silver proposal, incorporated (July, 1896) in the platform of the Democratic party. Had free coinage of silver been restored at the ratio of 16 to 1, since the bondholders had the option of demanding either gold or silver in payment, coin bonds presumably would still have meant gold bonds. Hence investors were ready to accept lower interest on these bonds than on currency bonds.